Thursday, May 24, 2012

Goldman Sachs is out with its Q1 2012 Hedge Fund Trend Monitor report. In it, they reveal the latest VIP list of 50 stocks that are most important to hedge funds. These are the positions that appear most frequently in the top 10 holdings of fundamental focused hedge funds.

It's no surprise that Apple (AAPL) is the most widely owned top position amongst fundamental hedge funds. But despite that, Greenlight Capital's David Einhorn argued hedge funds actually have less than 2% of assets in his Ira Sohn conference presentation. We've also posted Dan Loeb's thesis on AAPL as he was a big buyer of shares.

Both Tyco and Priceline were featured in the equity analysis section of our Q4 2011 Hedge Fund Wisdom newsletter due to heavy ownership by top funds. TYC is an event-driven play while PCLN is a huge growth and international play.

Goldman Sachs is out with its Q1 2012 Hedge Fund Trend Monitor and we've already posted up Goldman's VIP list of most important stocks to top funds. Now we're posting a new addition to their research: the very important short position list.

This tracks short exposure of hedge funds as an equal-weighted basket that "consists of 50 S&P 500 constituents with the highest total dollar value of short interest outstanding." It can be accessed on Bloomberg via < GSTHVISP >.

Goldman emphasizes that this list is not based on 13F holdings (because hedge funds are not required to disclose shorts). They also note that it's not a basket of stocks most held short.

Of the above. David Einhorn recently made comments about Amazon.com (AMZN) at the Ira Sohn conference. While he seemed to be skeptical of the company during his talk, he did not say he was short. He highlighted that the company has destroyed other businesses, taking market share, but criticized their weak profit growth.

Jim Chanos is short Dell (DELL) and he points to the decline of personal computing in favor of tablets and other mobile devices. He's been correct in that regard as Dell recently reported declines in those segments in their latest earnings release. But of course the bull case points to Dell's other business lines as they shift toward the enterprise.

Seth Klarman is one of the most successful investors of our time, so it's no surprise that investors have an insatiable appetite for any information regarding Baupost Group's investments. Today after rummaging through the French regulatory database, we found a French company Klarman's firm has been invested in for quite some time: Chargeurs (CRI:PAR).

It appears as though they originally invested in the company over 16 years ago (or at least that's the earliest trace of their ownership we could find). But the main reason we're highlighting it is because the company says the hedge fund still holds a stake in the company.

Not to mention, it appears as though the equity is trading at lower levels now than it was back in 1996 (the first trace of Baupost's activity).

Searching through past filings in the Autorite Des Marches Financiers (France's equivalent of the SEC), it shows that Baupost held a 5% stake in 1998. Then after shares of the company dropped, the following year they disclosed a 10% ownership stake in Chargeurs. In 2011, their ownership dipped below the 10% threshold.

And now, according to the company's website, Baupost currently hold the
equivalent of 8.68% of Chargeurs voting rights, or 1.16 million
shares.

Stock & Convertible Bonds

We use the term equivalent because it appears as though Baupost owns a mixture of shares and convertible bonds.

A search of the French regulatory system revealed that Baupost had 1.24 million shares on
April 13th, 2010, the date the filing was made public.

Because
preferential rights were given to existing shareholders to purchase the
convertible bonds, it seems likely that Baupost would have purchased some prior
to the March 12, 2011 cut off. Bear in mind that there was also a
secondary market in the preferential rights which complicates the
situation a bit further.

Convertible bondholders who hold until maturity in January 2016
will receive 6.06 shares at par, so shareholders will continue to be
diluted by bondholders.

It's situations like this that provide a good reminder that it's never
wise to blindly follow a hedge fund without trying to grasp the
situation and doing your own research first.

It's also an amazing example of how Klarman truly focuses on the long-term. He's held a stake in this company for 16 years, an eternity by today's investment timeframe standards.

About Chargeurs

Per Google Finance, Chargeurs SA is "a France-based company which, manufactures and distributes wool and textiles. The Company manufactures fabrics and garment interlinings for the apparel industry. It operates in three business segments: temporary surface protection, through Chargeurs Protective Films, primarily in the building materials industry, but also in electronics and household appliances; Technical textiles, through Chargeurs Interlining and Raw material processing, through Chargeurs Wool which specializes in topmaking, which consists of designing wool blends. Chargeurs SA operates in five production unites and it's present in 34 countries on five continents."

This isn't the only French company Klarman owns, as it recently came to light that Baupost had been buying Vivendi (VIV:PAR), the stock of a French conglomerate.

The hedge fund manager compares the turnaround at JCP to that of The Gap (GPS) in the mid 1980's as that company had a broken model to fix, hired talented new management, implemented a strategy change, and after some poor results eventually turned around and the stock rose ~60x.

While JCP's first quarter was disappointing in terms of same store sales (SSS) and gross margin, Ackman is thinking long-term here and points to goals of growing sales and achieving ~40% gross margins. He also highlights that the dividend cut has caused forced selling by yield investors.

On its website, Greenlight has posted its idea for a security that would satisfy investors' enormous appetite for yield. They argue that many companies have great balance sheets but their stocks trade at low multiples as investors don't want to pay for earnings.

While most companies elect to pay dividends, Einhorn says that these companies then just become "a stock with a low P/E and an attractive dividend."

Greenlight advocates companies creating a new type of preferred security, essentially a "perpetual preferred stock distributed directly to shareholders, so that shareholders would own and could separately trade both the GO-UP and the common stock."

BlueCrest Capital Management's Michael Platt spoke with Bloomberg Television about the European crisis and how he's trading the current situation.

On the financial impact of a Greek exit:

“I think the order of events would be Greece exits, shock wave across Europe, massive stress in banks, Spain turns into the battleground for the euro because of distresses in their own banking system, and then we either get a very swift and strong European solution or we get a hugely disorderly meltdown in Europe. “

On whether Spanish banks are acknowledging their real estate positions:

“No, they are not. In a country with 24% unemployment, they have a 3% provision against their mortgage book…The mortgage book of Ireland has a 10% provision. What is going on in Spain is that 22% of Spanish mortgages have been reworked, half of them more than twice. In other words, there’s evidence that the banks have been evergreening loans. In which case, 7% of it, you have to take another allowance of 7% to get it to Irish levels against 650 billion euros. That’s another 50 billion euros there. And the same is going on in the loans to small and medium enterprises.”

On how he's trading Europe right now:

“The problem is you can make a pretty sensible argument for almost any outcome in Europe. It could be a run on the banks very quickly. The Greeks could end up staying in for a little bit longer. They could vote to take themselves out. There could be a eurobond. The whole situation could be overtaken by events. We could have bank runs in Spain. We could have LTRO. We could have a concerted bond-buying action from the ECB. You can make a sensible argument for almost any outcome it's in such a state of flux right now. I think that when you get into these sorts of situations, the first thing you want to do is you want to ensure that your money is in a place where you like the credit so that if there is a major banking problem you're not going to lose money on credit…The reason why the treasury market's doing so well. Treasuries, and the short end of Europe with German government bonds, for two years now yield being essentially zero.”

Embedded below is the video of Platt's interview with Bloomberg Television:

First, Mindich's firm has disclosed a new position in Cove Energy (LON: COV). Due to trading on May 16th, the hedge fund has disclosed a position of 3.09% of outstanding shares in COV via equity swaps.

Per Google Finance, Cove Energy is "engaged in the exploration for and the development and production of oil and gas reserves. The Company operates in two segments: oil and gas exploration, and mineral exploration. The Company properties include Rovuma Offshore, where it has 8.5% working interest; Mozambique Onshore, where it has 10% working interest; Tanzania Mnazi Bay, where it has 16.38% working interest in production and 20.475% exploration interest; Kenya Offshore (L5, L7, L11A, L11B and L12), where it has 15% working interest, and Kenya Offshore (L10A and L10B), where it has 25% and 15% working interest."

Sable Mining

Second, Eton Park has significantly reduced their position in the London listed African miner Sable Mining (LON: SBLM). Their disclosure shows they've gone below the threshold of a 3% ownership stake. Market Folly originally flagged when Eton Park bought Sable back in April 2010 at a placing.

Sable Mining is still owned by Audley Capital who hold 7.1% of the shares outstanding.

Per Google Finance, Sable Mining is "formerly BioEnergy Africa Limited, is a mining company. It focuses on
investing in early stage exploration and development mining businesses
or assets located in sub-Saharan Africa."

Steve Mandel's hedge fund firm Lone Pine Capital recently filed a 13G with the SEC regarding its position in Ulta Salon, Cosmetics & Fragrance (ULTA). Per the filing, the hedge fund now owns a 5.6% stake in the company with 3,498,638 shares.

This marks a 61% increase in their position size since the beginning of April. The disclosure was made due to activity on May 10th as it looks like they utilized the recent sell-off to add to their position.

Per Google Finance, ULTA is "a beauty retailer, which provides one-stop shopping for prestige, mass
and salon products and salon services in the United States. During the
year ended January 28, 2012 (fiscal 2011), the Company opened 61 new
stores. It operates full-service salons in all of its stores. Its Ulta
store format includes an open and modern salon area with approximately
eight to 10 stations."

Ahuja is CNBC's hedge fund specialist and co-creator of the Delivering
Alpha summit. Through her roles, she's developed quite the rolodex and
has put it to work by giving readers unprecedented access to prominent managers. With a foreword by PIMCO's Mohamed El-Erian and an afterword by Myron Scholes, Ahuja's book profiles the following nine managers:

The book's cover photo is the perfect depiction of what many perceive the hedge fund industry to be: money and secrecy hidden behind locked doors (or in this case, a bank safe deposit box). But just as the cover suggests, Ahuja has unlocked the door to the industry's top titans and she lets you in on some of their secrets and little known facts.

How David Tepper Named His Hedge Fund

One such tidbit is found in Chapter 5 about David Tepper. While Market Folly often details Tepper's portfolio activity, The Alpha Masters sheds light on little known facts such as why he selected the name 'Appaloosa Management' for his firm to begin with.

It's always interesting to learn what hedge funds are named after because they often tell a story or reveal information about the managers themselves. In Tepper's case, it simply highlighted his desire to make money.

Ahuja writes,

"Tepper and Walton only needed the perfect name for their new venture. Greek mythology was popular at the time and they first decided on Pegasus, the flying horse, before discovering it was already taken. So Walton went to the library and came back with a book on horses. They knew they needed a name that started with 'A' to be first to receive faxes on trades, which was how orders were processed back then. They had learned well from their stints at Goldman that two minutes could make or break you. The first name they came across was 'Achaikos' but they found it too hard to pronounce. So they skipped ahead and settled on 'Appaloosa.' And the fund was born."

Why The Alpha Masters is a Must-Read

This book is a compilation of stories and fascinating facts about nine top managers. We've been tracking these prominent hedge funds for years, but The Alpha Masters kept peeling back layers of intricate details.

At first glance, some of the historical background on the managers' lives may seem tedious and boring. But then you realize that Ahuja has included these anecdotes because it paints a picture as to who the manager was and what they've become.

These stories told in the manager's own words make you feel as if you're simply at lunch with a friend reminiscing about their past. But Ahuha has masterfully taken that friend and replaced them with a hedge fund titan removed from Wall Street's trillion dollar pedestal. And when you've finished reading, these seemingly untouchable god-like moneymaking machines have morphed into mere mortals just like you.

After all, like many entrepreneurs and small business owners today, these hedge fund icons at one point in their lives took a big risk, pursued their dreams, and started their own firms. Ahuja chronicles the entire journey (even before the fund's inception) and the real value is seeing what each manager had to go through to get where they are now. As these dream chasers soared to amazing altitude, they now tell their success stories as luminaries sure to inspire the ascension of the next master money managers.

But apart from the human element, this book does exactly what its title implies: it's unlocked the genius of the world's top hedge funds by giving you tons of access to people you'd probably never meet as well as stories and wisdom you'd probably never hear otherwise.

The most valuable aspect of this book is that it gives you a front row seat in a classroom full of hedge fund icons detailing their investment thought process, what mistakes they've learned from, how they've developed as investors, and what it takes to succeed. While many perceive hedge funds to be secretive, Ahuja has acquired astute anecdotes from top managers and purveyed them for all investors to learn from. And, unbeknownst to us, it was a pleasant surprise to find MarketFolly.com listed as a reference at the end of the book.

Given the recent volatility in the markets, we thought it'd be worthwhile to check in with strategist Jeff Saut to get his thoughts on the action. We've pointed out how Saut's been cautious leading up to the recent decline, but what's he advocating now?

In his latest investment strategy note, he highlights numerous contrarian signals as reasons to step back into stocks. First, he points out that the CBOE Equity put/call ratio is flashing a buy signal "that has proven profitable at every downside inflection point since 1994."

Second, Saut draws attention to the American Association of Individual Investors (AAII) survey, which recorded its lowest bullish reading (23.6% bulls) since August 2010.

Lastly, Saut highlights that major indexes have been down 13 out of the last 14 sessions. He says that, "such downside skeins are at historic proportions since markets tend not to go more than 11 sessions in any one direction."

Simply put, Saut says it's time to bring out the 'buy list' and to begin "judiciously recommitting some of that cash to stocks." It appears as though he's advocating a gradual deployment of capital over time.

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